War Budgets, Then and Now

Aug. 1, 2007

Testifying as US forces were about to enter Iraq in March 2003, Treasury Secretary John W. Snow airily claimed, “The cost of the war will be small.” We recall Snow’s words today as a textbook case of fiscal miscalculation.

Whatever else it might be, Operation Iraqi Freedom isn’t cheap. The tab through 2007 equals $450 billion, says the Congressional Research Service in a June 28 report. With costs now running $10 billion a month, the amount will grow swiftly. Worse, the bill lands at a bad time—with the US needing to spend vast amounts to make war in Afghanistan, and bolster domestic defenses, not to mention replace thousands of decrepit aircraft, warships, and tanks.

For all that, though, Washington isn’t stirred. Traditional responses to high-cost wars—social program cuts, bond drives, tax increases—are not even discussed. It’s as if Snow was right. One could say that we are living in a post-9/11 world, but with a pre-9/11 fiscal policy.

Actually, somebody has said that—in those exact words. He is Robert D. Hormats, the managing director of Goldman Sachs and former national security and foreign affairs official under Nixon, Ford, Carter, and Reagan. His new book, The Price of Liberty: Paying for America’s Wars, does a useful thing: It recounts the seriousness with which Washington once financed its wars. In so doing, he casts a cold eye on the present.

Hormats argues that, six years into the Global War on Terror, neither the White House nor Congress has pushed for fiscal changes to ensure sustainable funding of US might. Instead, Washington chose to put the war on its credit card (deficit spending).

It was not always so. When Hormats surveyed earlier US wars, he found that most presidents tried to cover a large part of wartime costs by means other than borrowing. In the Civil War, Abraham Lincoln urged “every person of small means” to buy war bonds and pushed through the nation’s first personal income tax. World War I president Woodrow Wilson also imposed sacrifices.

In its peak years, World War II consumed nearly 40 percent of America’s gross domestic product. To help pay for it, President Franklin D. Roosevelt took draconian steps that slashed New Deal programs and raised the number of taxpayers from four million to 42 million.

President Harry S. Truman, during the Korean War, raised the top marginal tax rates to 91 percent for individuals and 70 percent for corporations. The Vietnam War forced similar steps on Lyndon B. Johnson. In 1968, he and Congress cut Great Society programs and enacted a tax increase.

Americans still borrowed heavily, but they paid off debt as fast as possible. It was, says Hormats, “a compulsion.”

Today’s political leaders have been reluctant to confront the public with the need for any sacrifice.

Hormats criticizes President Bush’s June 2001 tax cut, which took a huge bite out of a projected $3.1 trillion surplus. He notes that, rather than rethinking the cut in light of post-9/11 needs, the Administration doubled down. In January 2003, Bush proposed, and Congress agreed, to speed up implementation of the 2001 tax cuts.

Nor, writes Hormats, did Washington lift a finger to rein in spending. Indeed, the opposite happened. Federal outlays expanded dramatically as a result of richer education and transportation programs, higher jobless benefits, bigger farm subsidies, and a Medicare prescription drug benefit.

The result was predictable. In 2000, the US ran a surplus equal to 2.4 percent of GDP; by 2004, it was in deficit to the tune of 3.6 percent of GDP. This was the biggest swing in 50 years.

“Congress had never before increased nonsecurity spending and cut taxes while also appropriating large sums to fight a war,” writes Hormats. He added, “By supporting and signing expensive spending and tax legislation, [Bush] broke with a tradition that had extended from Madison through Lincoln, Wilson, Franklin Roosevelt, Truman, and eventually, Johnson and Reagan [at the height of the Cold War].”

The war against terrorists resembles the Cold War, in that it will be long, expensive, and punctuated by crises. The financial basis must be strong.

As Hormats sees it, the path to sustainable financing entails a number of steps—none new, all painful. These include harsh curbs on popular programs, taxes that raise more revenue, and “matching payouts under entitlement programs more closely to the money flowing in.”

The latter point refers to Social Security and Medicare, whose costs will mushroom when 79 million baby boomers retire and draw benefits. Social Security alone is projected to run a shortfall of $250 billion a year by 2030.

As Hormats makes plain, the Air Force and the other services have a huge stake. Unchecked, he said, entitlements are sure to “crowd out” defense spending. Unchecked, the piling up of national debt—$9 trillion today—could limit US power to borrow for truly urgent security needs. This could be especially dangerous in event of another terrorist attack. We should not forget that, when al Qaeda struck on 9/11, the US budget was in surplus. That provided a cushion to help get over the economic shock.

The Bush Administration maintains that, unlike periods in the past, the government can use cheap capital to finance the deficit. Moreover, they point out that the tax cuts have created new wealth (and with it, tax revenue), and that, by such expedients, the US will in time “grow” out of its deficits.

Here, there is room for honest disagreement. Hormats, for his part, argues that this is irresponsible. We are not prepared to go that far.

We note, however, that all prior wartime presidents found it wise to cut domestic spending and raise taxes to free up resources for defense, and then pay down war-related debt. Moreover, real cuts in entitlements probably aren’t politically feasible except as part of a grand compromise accepting some form of tax increase, too.

The President has chosen a different path. We hope he is proved right. However, we should recognize his decision for what it is—a gamble—and start looking into fallback plans.